Reimagining Retirement

The New Finance Of Longevity


Connecting the dots to ‘retirement readiness’

by Sue Reibel, CPA

Ms. Reibel is CEO, John Hancock Retirement. Visit www.johnhancock.com

Thanks to modern medicine, people are living longer and planning retirements their grandparents couldn’t have imagined. But planning and saving for retirement aren’t easy for the average American investor, even under normal circumstances. Add in the economic and social upheaval caused by the pandemic, and reimagining retirement just got even harder.

For eight years, John Hancock has conducted an annual survey of retirement plan savers to gain insight on their financial stress and well-being.[1] When we asked people age 50 and older how they’re doing with their retirement savings, 38% said their savings are behind schedule, and 8% said they weren’t sure. Almost a quarter said they believe they’ll have to delay retirement, and 18% weren’t sure if they could retire when they’d planned. And 81% want to be more confident making financial decisions.

Source: John Hancock financial stress survey, 2022. 

With so many investors either behind schedule or uncertain about when they can retire, access to personalized guidance and advice is critical to helping them make informed decisions as they plan for their retirement in a post-pandemic world.

They’re All Connected: The Economy, Retirement And Longevity

In our survey, the number one worry for participants older than 50 is the economy and number two is their retirement savings. And although pre-retirees are usually less stressed than their younger co-workers, this year, they’re the least optimistic of all age groups that the economy will get better in the next year. When asked what they’d be focusing on in the next three to six months, these financial concerns came out on top:

  • Planning for retirement
  • Paying off debt and ensuring savings are invested wisely (tie)
  • Healthcare costs

Pre-retirees are right to be concerned. A 55-year-old man today can expect to live to age 85, and a 55-year-old woman to 87½[2]—and because those are averages, many will live much longer. Although only 3% of the U.S. population was over age 100 in 2016, that’s expected to grow to 15% by 2060.3 The upside of longevity is a reimagined retirement that can mean taking on a second career, volunteering, traveling, babysitting the grandkids, or playing pickleball—the world is a proverbial oyster. But the potential for longevity also has implications for a pre-retiree’s retirement budget, as well as the makeup of their investment portfolio.

Source: https://www.ssa.gov/oact/population/longevity.html, 2022. 

Retirement Planning: The Guiding Decisions

Reimagining retirement takes more than imagination—it requires lots of decisions. In order to come up with a retirement budget and a plan for meeting their goals, investors need to make basic decisions, such as:

  • When to retire
  • Where to retire
  • Partial or full retirement
  • What to do in retirement

And there are savings and income-related decisions to make, including:

  • How to allocate their investments
  • How to draw down their savings in a tax-efficient manner
  • When to take Social Security to help optimize overall benefits

These guiding decisions then form the basis of their budget, helping them outline their essential and nonessential expenses. But one critical budget item they have less control over is healthcare. Healthcare costs are the biggest wildcard and the number one retirement worry for our retirement plan participants in their 50s.[1]

Calculating The Healthcare Costs Of Longevity

That’s why, at John Hancock, we help our participants to plan for retirement by projecting how much their expenses may be in those three categories: essentials, healthcare, and nonessentials. We start with a basic projection that’s based on their income and savings rates, and we provide them with the tools to model different scenarios.

They can fine-tune their projections and reimagine their retirement with a variety of inputs.

  • When and where they’ll retire
  • Whether they’ll have additional income
  • Contribution rates
  • Certain health conditions

With this data, we can show people their own projected expenses[3] for each year of retirement. They can model how different decisions and other factors affect their spending needs in retirement.

For example, a 50-year-old male may think he’s on track to meet his retirement readiness goal based on his savings and his plans for retirement. But when we factor in his health indicators, such as being overweight and having high blood pressure, his healthcare spending goes up, lowering his retirement readiness by five percentage points. Armed with this critical information, he now understands he’ll need to either save more or adjust his spending strategy, which he could do by retiring somewhere with a lower average cost of living.

The number one worry for participants older than 50 is the economy and number two is their retirement savings. And although pre-retirees are usually less stressed than their younger co-workers, this year, they’re the least optimistic of all age groups...

With 68% of investors worried about being able to afford healthcare in retirement,[1] having the ability to project the impact of their decisions and their known health conditions helps them reduce their stress and enables them to fine-tune their retirement strategy while they still have time to fill any estimated gaps. And it has our participants taking action: Ninety-four percent of our retirement planner users added information to personalize their projections,[4] and 23.6% increased their contribution rate, with an average increase of 4.2%.[5]

Investing For Uncertainty

Baby boomers who retired between 2016 and 2020 did so with a booming stock market and low inflation. Enter the pandemic, and portfolios were hit by market volatility in March 2020 and periodically since then. And then inflation came along in 2021. How are pre-retirees in 2022 supposed to make sure they don’t outlive their budget and their portfolio when they don’t know what milk and gas will cost? And how should they be invested given market uncertainty, their planned retirement date, and the potential for longevity? Planning for these economic conditions can be tricky, as the majority of investors don’t have the financial knowledge to manage these complications on their own.

The complexities involved in retirement planning help explain why more and more people are turning to financial professionals for help.[1] And it’s why we see an increase in investors seeking professional guidance as they get closer to retirement, with 43% of people 50 and over working with a financial advisor, compared with 22% of people age 36 to 50 and 18% of those younger than 36.[1]

Reimagining The New Reality

Although the economic challenges of the pandemic will change over time, they’re important elements that investors need to consider. In addition to working through the guiding decisions of retirement, investors must account for:

  • Inflation—Recent inflation has been an important warning and a reminder of the impact it can have on a budget. Even if inflation slows down, as some say will happen when the supply chain gets back to normal, the potential for inflation needs to be factored into all planned retirement spending.
  • Market volatility—The ups and downs of the market have a couple of impacts on retirement. Retiring and withdrawing from retirement accounts in a down market can be devastating to a retiree’s retirement income, so anyone planning to retire in the near term needs to be sure the timing is right. And the potential for longevity means that the risk profile of retirement portfolios may need reimagining, as they may need to sustain income for more than 30 years of retirement.
  • Rising interest rates—After years of historically low interest rates, what’s worked in the past may not work in the future.

With the economic repercussions of the pandemic adding new wrinkles to retirement planning, there’s a heightened need for investors to revisit their retirement strategies. The expert guidance of a financial professional may be critical to help many pre-retirees make their reimagined retirement a reality they can enjoy.

 

 

 

 

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[1] In August 2021, John Hancock commissioned our eighth annual financial stress survey with the respected research firm Greenwald & Associates. An online survey of 1,162 workers was conducted between 8/4/21 and 9/3/21 to learn more about individual stress levels, their causes and effects, and strategies for relief.
This information is general in nature and is not intended to constitute legal or investment advice. This report presents the results of research conducted by Greenwald & Associates on behalf of John Hancock. Greenwald & Associates and John Hancock are not affiliated, and neither is responsible for the liabilities of the other.
The objectives of this study were to: i) quantify the financial situation and level of financial stress of John Hancock plan participants and plan participants outside of John Hancock; ii) determine the key triggers of financial stress; iii) understand the extent to which actions, including actual financial behavior and planning activity, ameliorate stress; and iv) assess retirement preparation and readiness. It was an online survey of 1,162 John Hancock plan participants that was conducted from August 4 through September 3, 2021, with an average survey length of approximately 19 minutes per respondent. All statistical testing is done at .95 and .99 significance levels. The maximum margin of sampling error at the 95% confidence level is ± 4.1%. Percentages in the tables and charts may not total to 100 due to rounding and/or missing categories.
[2] “Projected Age Groups and Sex Composition of the Population,” census.gov, 2017.
[3] The projected retirement income estimates for current John Hancock accounts, future contributions, employer contributions (if applicable), and other accounts set aside for retirement used in this calculator are hypothetical, and for illustrative purposes only, and do not constitute investment advice. Results are not guaranteed and do not represent the current or future performance of any specific account or investment. All investments carry a degree of risk, and past performance is not a guarantee of future results. Due to market fluctuations and other factors, it is possible that investment objectives may not be met.
[4] John Hancock internal data based on participants on John Hancock’s Group Annuity and Open Architecture platforms, who used the retirement planner from May–November 2020.
[5] John Hancock internal data based on the 116,589 active participants on John Hancock’s Open Architecture platform, who used the retirement planner from June 1, 2020, through May 31, 2021.